Key Highlights

• Bank of Japan’s Ueda maintains hawkish stance with upbeat growth outlook and believes inflation expectations will rise with growing labor shortage
• China urges nations not to impose trade curbs “even when coerced” as Beijing launches an investigation into Mexico’s trade barriers
• U.S. fire at Chevron’s El Segundo refinery in Los Angeles sends oil and gasoline prices higher, still near 4-month lows on EIA inventories, OPEC+ production expectations

Chart of the Day

JPY and USDJPY flow becoming defensive ahead of LDP vote

^{Source: BNY}

The JPY has taken a relatively defensive stance ahead of tomorrow’s LDP leadership vote. Even though BoJ commentary is clearly pointing toward further tightening – reinforced by Governor Ueda overnight – much of the shift in policy differentials between the BoJ and the Fed, in addition to between Japan and other countries, was well reflected in flows in the first half of September. The market view that there would be another opportunity to realize JPY valuations has contributed to the JPY retaining a solid holdings position. However, should the next administration adopt a more expansionary fiscal tone, it would be difficult to dismiss the impact on policy execution. Even before the election was called, the BoJ had been adjusting quantitative tightening operations to limit the impact on market functioning and the curve – a step recently emulated by the Bank of England. Should fiscal impulse strengthen beyond current expectations, especially with inflation running ahead of target, further mitigation through policy adjustments will be necessary and this could impact the trajectory of real rates. The knock-on effect on the JPY would be obvious, though for now it appears that much of the selling is being undertaken through USDJPY purchases. Even if the status quo generally prevails, iFlow’s JPY holdings figure indicates it could be difficult to add to JPY longs aggressively from current levels, notwithstanding ongoing valuation attractions.

What's Changed?

Equities continue to rally to record highs globally, led by AI investments. The “green on the screen” for equities left bonds lower and the USD mixed. The focus on JPY and the LDP election this weekend remains intense, as this is where the synergy of fiscal and monetary policy frays the most. Investor fears that the government will spend and borrow more clash with Governor Ueda’s promise to normalize rates the central bank balance sheet. USDJPY 145–150 is the envelope, but the stamp to send this letter out remains linked to politics. Oil rallies as the fire in Los Angeles at a key refinery disrupts supply. Markets are sanguine about growth with few surprises from the overnight service PMI reports. GBP is the exception as the dramatic 3.2-point drop in that report lifts expectations for BoE easing. The markets see synergy between data and monetary policy even if the government doesn’t. There is a lesson here for the U.S. as investors wish for a labor report and the government shutdown extends into a third day. Weaker growth usually drives prices lower but not always, and the government policy is important for how consumers and businesses view prices into the new year. Private sector jobs data from ADP and Challenger suggest clear fragility in the U.S. labor market, with the ISM services report today key for the investor spin on how prices and jobs stack up. Wage pressure is not going down, goods prices look sticky and the full CPI report likely won’t be released next week unless there is coordination and cooperation between political parties. This leaves the day ahead as one where GBP, JPY and USD are barometers for concerns underneath the AI-induced equity rally, the bond calm from government shutdowns and the commodity turmoil from supply.

What You Need to Know

In a speech in Osaka today, BoJ Governor Ueda stressed that the Bank will continue gradual rate hikes and adjust the degree of monetary accommodation if Japan’s growth and inflation outlook is realized. He noted that the economy has recovered moderately, with improving business sentiment, resilient investment and rising wages, although exporters’ profits have been pressured by U.S. tariffs. Core CPI excluding fresh food has been running at 2.5–3.0%, mainly due to food prices, but is expected to fall below 2% next fiscal year as temporary factors fade. Ueda outlined three key risks: global economic uncertainty, the effects of U.S. tariffs on corporate wage and price-setting, and prolonged food price rises. He added that while the policy rate was kept at 0.5% last month, the Bank has started reducing its balance sheet through lower JGB purchases and planned ETF and J-REIT sales. Nikkei +1.853% to 45769.5, USDJPY +0.082% to 147.38, 10y JGB +0.1bp to 1.662%.

Ahead of Saturday’s Liberal Democratic Party leadership election, the five candidates vying to become Japan’s next prime minister signaled caution about calling a snap general election, instead pledging to prioritize domestic issues such as rising living costs. Leading contenders Shinjiro Koizumi, Sanae Takaichi and Yoshimasa Hayashi all ruled out immediately dissolving the lower house, stressing a focus on policy delivery. All five candidates said they were open to broadening the coalition to secure legislative passage but named no specific partners. None pledged to reinvestigate the political funds scandal that weakened the LDP. With no clear front runner among the 590 eligible votes, a runoff is likely. The winner is expected to become prime minister, as the ruling coalition retains the largest bloc in parliament, despite recent losses under outgoing premier Shigeru Ishiba.

China’s Ministry of Commerce announced it has launched a trade and investment barrier investigation into Mexico’s planned tariff hikes and other restrictions on Chinese goods, citing provisions under the Foreign Trade Law and related regulations. The move follows Mexico’s initiation of four new anti-dumping probes targeting float glass, PVC-coated fabric, self-adhesive tape and steel bolts, bringing its total this year to 11 cases, nearly double last year’s number. The ministry said China firmly opposes protectionist measures that undermine its legitimate interests, urging Mexico to strictly comply with WTO rules during its investigations. It stressed that while China has shown restraint in trade remedy actions, it will take all necessary steps, including in trade and investment, to safeguard its companies’ rights. The ministry also warned that, amid U.S. tariff pressure, countries should resist unilateralism and avoid restricting Chinese goods under external coercion. CSI 300 +0.447% to 4640.69, USDCNY 0% to 7.1224, 10y CGB –2.6bp to 1.871%.

Eurozone private sector growth strengthened slightly in September, with the HCOB Composite PMI rising to 51.2 from 51.0 in August, its highest level in 16 months. Services activity improved as the Services PMI climbed to 51.3, an 8-month high, while new orders recorded their fastest expansion since May 2024. Germany and Spain led the upturn, with Spain showing the strongest activity increase, while France remained the outlier with a sharper contraction. Despite growth in output, new export orders declined for the 43rd consecutive month, keeping overall demand muted. Employment fell for the first time since February, though only fractionally, while backlogs of work decreased at the quickest pace in three months. Input cost and output price inflation eased, reaching multi-month lows, while business confidence rose to its second-highest level since July 2024, albeit still subdued historically. EuroStoxx 50 +0.173% to 5655.57, EURUSD +0.205% to 1.1739, BBG AGG Euro Government High Grade EUR +1.1bp to 2.927%.

What We're Watching

U.S. September nonfarm payrolls expected at 52k vs. 22k in August but likely delayed due to government shutdown. The unemployment rate is seen as unchanged at 4.3% while average hourly earnings is seen at 0.3% m/m, 3.7% y/y vs. 0.3% m/m, 3.7% in August.

U.S. September ISM services forecast to ease from 52.0 to 51.7 with employment expected up to 46.6 from 46.5, but still contracting.

Central bank speakers: Fed Vice Chair Philip Jefferson speaks on economic outlook and monetary policy framework.

What iFlow is Showing Us

Mood: iFlow Mood is negative, with net sold in both equities and core sovereign bonds. iFlow Mood is –0.038.

FX: IDR, DKK and CZK posted the most inflows against broad outflows in the rest of iFlow Universe, led by COP.

FI: U.K. gilts and Chinese government bonds posted the most inflows, followed by demand for Eurozone and Singapore government bonds and U.S. Treasurys. Turkey and New Zealand government bonds were most sold.

Equities: Broad selling pressure globally except for light buying in Indonesia, Chile and South Africa. Switzerland, Canada, Europe, the U.K., Norway, Poland, China and Taiwan equities were significantly sold.

Quotes of the Day

“Synergy is the creation of a whole that is greater than the sum of its parts.” – Stephen Covey

“Coming together is a beginning. Keeping together is progress. Working together is success.” – Henry Ford

Economic Details

Euro area industrial producer prices fell 0.3% m/m in August and 0.6% y/y, while in the EU they declined 0.4% m/m and 0.4% y/y. Within the euro area, prices dropped 1.3% for energy and 0.1% for intermediate and durable consumer goods, but rose 0.1% for capital and non-durable consumer goods. Annual comparisons showed declines of 0.3% for intermediate goods and 4.1% for energy, while capital goods rose 1.7%, durable goods 1.6% and non-durable goods 2.0%. Among member states, the largest monthly decreases were in Denmark (–1.3%), the Netherlands and Romania (–1.0% each), and Austria (–0.8%), while the steepest rises came from Estonia (+5.4%), Finland (+1.9%) and Slovakia (+1.3%). Annual declines were led by Portugal (–4.3%), Luxembourg (–4.2%) and Estonia (–3.2%), while Bulgaria (+9.1%), Sweden (+4.1%) and Romania (+3.1%) posted the highest increases. EuroStoxx 50 +0.173% to 5655.57, EURUSD +0.205% to 1.1739, BBG AGG Euro Government High Grade EUR +1.1bp to 2.927%.

Germany’s services PMI rose to 51.5 in September from 49.3 in August, its highest level in eight months, signaling modest growth despite weak demand. The composite PMI also improved to 52.0, a 16-month high, driven by stronger manufacturing and renewed services expansion. However, new business inflows fell for a second month and export sales weakened, while service sector employment recorded its steepest fall since June 2020 as firms adjusted to reduced workloads. Wage pressures kept input costs elevated, feeding into faster output price inflation at a four-month high. Although demand remained fragile, business expectations reached their strongest level since May 2024, supported by hopes of improved economic conditions. DAX +0.157% to 24460.9, EURUSD +0.205% to 1.1739, 10y Bund +0.7bp to 2.706%.

France’s services PMI fell to 48.5 in September from 49.8 in August, marking a deeper contraction in activity, the sharpest since April. Firms reported weak demand, client hesitancy and rising political uncertainty, which also drove a continued decline in new orders both domestically and abroad. Despite subdued conditions, employment edged higher, though only marginally, while backlogs decreased. Prices charged were discounted for the first time since May as companies sought competitiveness, even as operating expenses rose moderately. Business confidence improved to a three-month high but remained below average, with optimism largely linked to expectations of new product launches, while political and economic headwinds kept overall sentiment muted. CAC40 +0.277% to 8078.94, EURUSD +0.205% to 1.1739, 10y OAT +0.4bp to 3.523%.

Italy’s services PMI strengthened to 52.5 in September from 51.5 in August, supported by the fastest new order growth in 17 months. This expansion marked the 10th consecutive month of activity growth, driven by solid domestic demand, though export business declined for the 14th straight month amid weak European demand and geopolitical uncertainty. Employment rose for the eighth consecutive month, albeit at the slowest pace since April, while backlogs continued to decline. Input costs remained elevated, particularly from rising wages linked to collective agreements, alongside higher energy and rent costs, though output price inflation eased to its weakest in 10 months. Business confidence improved, underpinned by optimism about rising demand and the potential boost from the 2026 Milano Cortina Winter Olympics. FTSEMIB +0.508% to 43297.17, EURUSD +0.205% to 1.1739, 10y BTP +0.2bp to 3.521%.

Italy’s retail sales fell in August 2025, down 0.1% m/m in value and 0.3% in volume, with declines across both food (–0.1% value, –0.4% volume) and non-food products (–0.1% value, –0.2% volume). Over June–August, sales rose 0.8% in value and 0.3% in volume, supported by food (+1.2% value, +0.2% volume) and non-food goods (+0.5% value, +0.3% volume). Compared with August 2024, sales increased 0.5% in value but dropped 1.3% in volume. Food gained 1.6% in value but fell 2.2% in volume, while non-food contracted in both. By category, personal care products rose 5.4%, while appliances and pharmaceuticals fell 3.4%. Large-scale retail (+2.5%) and e-commerce (+6.1%) outperformed, while small shops (–2.2%) and out-of-store sales (–2.6%) weakened.

Spain’s services PMI rose to 54.3 in September from 53.2 in August, marking its strongest activity expansion since January, supported by a sharp rise in new work. Growth was primarily domestic, though export orders increased slightly for a third consecutive month, held back by soft tourism demand. Business confidence reached a six-month high, with firms planning service expansion and stronger commercial activities. Employment continued to rise for the third straight year, though September’s increase was the weakest since late 2023. Rising wages drove higher input costs, keeping inflation pressures elevated, though output price growth slowed to its weakest in four months. The composite PMI held at 53.8, reflecting service-led growth while manufacturing slowed. IBEX 35 +0.812% to 15650, EURUSD +0.205% to 1.1739, 10y Bono +0.4bp to 3.245%.

U.K.’s services PMI fell sharply to 50.8 in September from August’s 54.2, marking a five-month low and signaling only marginal expansion. Growth was curbed by weak demand, subdued consumer confidence, and delayed corporate spending ahead of the Autumn Budget. New orders rose only slightly, export sales contracted and backlogs declined at the fastest pace since May. Employment dropped again, extending a 12-month run of job losses, with firms citing high staff costs and weak pipelines. Input cost inflation remained strong, led by wages, utilities and food, though it eased to its second-lowest rate in 2025. Output price growth slowed to the weakest since June amid greater competition. Business optimism softened, with only 46% of firms expecting growth, while the composite PMI slipped to 50.1, its lowest level in five months, as services stagnated and manufacturing contracted. FTSE 100 +0.482% to 9473.2, GBPUSD +0.134% to 1.3458, 10y Gilt –0.8bp to 4.702%.

Norway’s registered unemployment was stable at 2.1% in September, with 62,000 people fully unemployed, about 100 fewer than in August. Including 22,800 partially unemployed (0.8%) and 10,400 job seekers on measures (0.3%), NAV recorded 95,100 job seekers in total, equal to 3.2% of the labor force. Unemployment remained highest in Oslo and Østfold at 2.8%, while Troms recorded the lowest at 1.2%. By sector, joblessness was most prevalent in tourism and transport (2.9%), and lowest in academic professions (0.9%). Vacancies declined 11% y/y, with most new jobs advertised in healthcare, retail and services. OSE +0.595% to 1660.3, EURNOK –0.107% to 11.6877, 10y NGB +0.7bp to 4.058%.

Sweden’s services PMI rose sharply to 57.7 in September from 53.8 in August, reaching its highest level in more than three years. The improvement was mainly driven by business volumes, followed by employment and longer delivery times, while new orders weighed negatively. For the first time in over a year, the employment index entered growth territory, though analysts cautioned it was too early to confirm a turnaround in hiring plans. Price pressures eased as the input cost index declined to 53.5 from 55.8 in August. The composite PMI increased to 57.1 from 54.2, marking a 12th consecutive month in expansion, with growth momentum showing signs of strengthening despite remaining fragile. OMX +0.467% to 2721.237, EURSEK –0.07% to 11.0133, 10y Swedish GB –0.1bp to 2.736%.

Turkey’s September producer and consumer price indices both showed strong annual gains, though they were below last year’s levels. The domestic producer price index (D-PPI) rose 26.59% y/y and 2.52% m/m, with increases across mining (28.73%), manufacturing (26.63%) and utilities, where water supply jumped 55.03%. Intermediate goods rose 22.27% and non-durable consumer goods 33.21%, while energy prices advanced 25.17%. The consumer price index (CPI) increased 33.29% y/y and 3.23% m/m, with food and non-alcoholic beverages up 36.06%, housing costs rising 51.36%, and transport up 25.30%. Excluding unprocessed food, energy, alcoholic beverages, tobacco and gold, CPI rose 32.86% y/y and 3.34% m/m. On a 12-month moving average, CPI stood at 38.36% and D-PPI at 25.83%, highlighting persistent but moderating inflationary pressures across producer and consumer prices. BI 100 –0.798% to 10994.23, USDTRY +0.177% to 41.6847, 10y TGB –5bp to 30.82%.

South Africa’s PMI registered 50.2 in September, up slightly from 50.1 in August, signaling a fifth straight month of marginal growth. Output and new orders expanded further, including the first increase in export orders since March, supported by stronger African demand despite weak U.S. and European markets. Firms benefited from easing cost pressures, as input inflation fell to an 11-month low, aided by currency gains and lower staffing levels, although employment declined for a second month. Delivery times improved for the sixth month running, while purchasing activity softened slightly. Business sentiment weakened notably, with less than a third of firms expecting growth over the next year, the lowest optimism since mid-2021, reflecting geopolitical uncertainty and export challenges. JSE TOP40 +0.74% to 101855.2, USDZAR –0.279% to 17.2438, 10y SAGB –1.1bp to 9.171%.

Japan final September PMI services at 53.3 (flash 53.0, August 53.1).  Service sector continued to expand at a solid pace at the end of the third quarter. Companies registered further steep increases in both business activity and new orders, which supported the first expansion of employment since June. Expectations regarding the outlook for business activity also improved in September. Price data indicated that overall inflationary pressures remained marked, with input prices rising sharply, which in turn drove a solid increase in output charges. The country’s August unemployment rate spike from 2.3% to 2.6% y/y, more than consensus of 2.4%, matching the highs in 2024. The job-to-application ratio dipped to 1.20 from 1.22. The labor force participation rate rose from 63.9% to 64.0%. Nikkei +1.853% to 45769.5, USDJPY +0.082% to 147.38, 10y JGB +0.1bp to 1.662%.

Australia final September PMI services at 52.4 (flash: 52.0, August: 55.8). The rates of new business and services activity growth were solid despite easing since August. New export business also continued to rise. Higher new business inflows led to faster employment growth, but confidence among service providers fell slightly. Meanwhile, rates of input cost and output price inflation both eased in September. ASX +0.492% to 5124.37, AUDUSD +0.152% to 0.6606, 10y ACGB –0.4bp to 4.333%.

Singapore August retail sales rose 5.2% y/y compared to 4.6% growth in July. Excluding motor vehicles, retail sales increased 4.6%, compared to the 3.9% growth in July. On a seasonally adjusted basis, retail sales increased 0.5% in August over the previous month. Excluding motor vehicles, seasonally adjusted retail sales rose 1.3% compared to July. The estimated total retail sales value in August was $4.3bn. Of this, an estimated 13.1% was from online retail sales, compared to the 13.0% recorded in July. Excluding motor vehicles, the total retail sales value was about $3.7bn, of which 15.3% was from online retail sales. Online retail sales made up 54.5%, 32.6% and 11.3% of the total sales of the computer & telecommunications equipment, furniture & household equipment and supermarkets & hypermarkets industries, respectively. STI +0.333% to 4409.84, USDSGD –0.016% to 1.2889, 10y SGB –2.5bp to 1.907%.

Singapore’s private sector activity strengthened in September, with the S&P Global PMI rising sharply to 56.4 from 51.2 in August, the highest reading in a year. The improvement was driven by strong growth in new orders and output, supported by successful marketing and robust demand. Employment rose at the fastest pace since February 2024, while firms also increased purchasing and inventories, though supply chain delays led to rising backlogs. Input costs rose at the quickest rate since January, reflecting higher material, utilities and wage expenses, and selling prices increased at the fastest pace this year. Business confidence improved to its strongest level in nearly a year, with forward-looking indicators pointing to sustained growth into the fourth quarter.